JNJ, great business, great history, great future

You may have heard this one before, it goes something like this: What is the difference between JnJ and the US government? The answer is a very cheeky one has a triple A credit rating from S&P and the other does not. In fact the company is one of only 7 companies inside of the top 100 companies by market cap to have this distinction. There are some other amazing stats about Johnson & Johnson that I think are worth sharing. According to the annual report, the company has had only 7 CEO's in their 127 years, so I guess the job is rewarding and challenging enough for the chief to stick around long enough. Alex Gorsky is currently the 9th chairman (he is also the CEO). The business has been listed since 1944, I am pretty sure that when they hit the screens tape, times were pretty uncertain!


The company also has an unbroken 51 years of dividend increases, that is probably the most impressive of all their statistics. There have been 29 consecutive years of adjusted earnings increases. Amazing. But over the last decade, as per the last annual report, the stock had actually under performed the broader market. Not so anymore, the company can now say that they have captured the lost ground back and now have outperformed over the last decade. Over the last 35 odd years JnJ have absolutely smoked the S&P 500, quality is permanent, a bit like class is permanent and form is temporary, you know. I just wish the same would apply in the UAE, we are getting a proper thumping there sadly. Perhaps today will bring something different!


Back to this company, which should probably has been called Johnson Brothers seeing as there were three of them who started this business back in 1886, and not Johnson & Johnson. There must have been awkward cricket noises when one of them put the name forward. Or perhaps that was the point, trying to figure out who were the two of the three. What is in a name? Well, will a brand as global as this, a lot! Band Aid in the US is synonymous with plasters as we know them here. If you have access to decent infrastructure and live in a modernising world, then no doubt you have been reached by Johnson & Johnson products.


The business is split along three divisions, the one you perhaps know the best is their consumer products division, if you have a baby you know their baby products well. They have a massive skin care presence, you will know their Neutrogena product! Of course the band aid, and the Listerine brand. Coincidently the name Listerine is derived by the Johnson brothers inspiration, a fellow by the name of Joseph Lister, and formulated before JnJ was first formulated and produced by two fellows (Dr. Joseph Lawrence and Jordan Wheat Lambert) in 1879 but only acquired as a brand by JnJ from Pfizer in 2006. Pfizer sold their consumer division to JnJ, and the full circle had been made I guess. The inspiration (Joseph Lister) behind the brothers founding the business and the associated product that ended up in their stable was poetic at some level. The other consumer products include Women's health (Stayfree and Carefree), OTC medicines (Imodium, Tylenol and Sudafed) as well as nutritional products and contact lens solution and associated cleaning products (Acuvue). The actual contact lenses fall into the MD&D division, see below. That is the one segment that you probably know well, although it is JnJ's smallest division by revenue and only the sixth largest consumer care business in the world.

Possibly their least well known business to the man on the street is their Medical Devices and Diagnostics (MD&D) unit, which as a stand alone is the largest of its kind on the planet. Not in the universe, because not all of it (the universe) is known to us. The company has been busy in this space, divesting from the DePuy trauma unit, having made a more sizeable Synthes acquisition. The combined division is Think orthopaedics and cardiovascular when you try and visualise this business. Joint replacements and stents. Surgical speciality materials through to a cutting edge (as per their annual report) computer-assisted personalized sedation system. Wow. This is truly the next step up in terms of medicine, diagnostics, along with exciting new therapies.


And that leads us into their third division, the pharma one. Whilst you may think of JnJ as a giant globally, and they are, believe it or not they are only the 8th largest pharma (standalone) business on the planet. As per the annual report this segment houses products that are used in the following areas: anti-infective, antipsychotic, contraceptive, gastrointestinal, hematology, immunology, infectious diseases, neurology, oncology, pain management, thrombosis and vaccines. Many well known therapies that continue to treat ailments that afflict our species. This was interesting, I found this stat in their annual report, and it goes to the core of these businesses in the sector as well as the leader (which we think is JnJ): New products introduced within the past five years accounted for approximately 25% of 2012 sales. Wow, that is pretty amazing.


The other day I was interacting with a client about research and development in the whole industry, and the number is close to 100 billion Dollars per annum. That is what companies drop each and every year in a pursuit to find cures for ailments that still afflict us. I said that again. JnJ itself last year invested 7.7 billion Dollars, or around 11.4 percent of overall sales on R&D, as per the annual report. It is an expensive business to keep up with your peers, but we should be highly grateful that big business does this. Expensive therapies might cost a lot, but in the end they are worth it. As a collective, I mean.


So there you go, you have a fairly good overview of the company. Yesterday afternoon local time the company released their Third-Quarter Results. An EPS beat of 8.8 percent, excluding special items to 1.36 cents per share. Modest sales growth and some currency headwinds in Asia Pacific, but most importantly for the short term: The Company increased its earnings guidance for full-year 2013 to $5.44 - $5.49 per share. The stock caught a bid against a market that was heading in the other direction, closing the day higher. If you scratch under the surface, two things become apparent about this business, firstly that it is no longer a US business, the split is roughly 55/45 in favour of their international business segments. I suspect that will only continue to grow, skewed back to the US from time to time when the blockbusters come online, and as you can see, those will happen. Again, you can see the new therapies, oncology as well as the immunology division are the main growth segments for JnJ.


So what now? Well, the investment case is pretty simple. Each business, if it were to be a standalone business would probably be worth more i.e. if the group unbundled a single, or all of the divisions there would be a value unlock. Or so the theory goes. But that is not why we own the company. We own it because at the core of our investment themes is the theory that medical spend across the globe will continue to grow at above economy rates. The richer the middle classes become globally, the more they spend on healthcare.